Hike in income-tax exemption likely for interest payment on home loans

In the coming Union Budget there is going to be a good news for the home loan borrowers as government is planning to hike income-tax exemption available for interest payment on home loans to Rs 2.5 lakh a year, in order to boost demand and re-establish the slowdown-hit housing industry.

An anonymous government official told the ministry of Housing and Urban Development has recommended finance minister Pranab Mukherjee to make an announcement in this regard as part of his Budget presentation in early July.

Currently the taxpayers who have taken housing loans are entitled for income-tax exemption on interest payment of up to Rs 1.5 lakh every year. In addition to this, the repayment of principal amount is part of investments entitled for benefit under Section 80(C) of the Income-Tax Act, which has a ceiling of Rs 1 lakh.

The President Pratibha Patil in her address to both the houses of Parliament has highlighted the fact that housing is one of the main focus areas of the government. It has been observed the existing tax exemption limit is inadequate as a two-bedroom house in the big cities costs as a minimum of Rs 25 lakh.

Taking in consideration that a person taking a loan of Rs 20 lakh at an interest rate of 9.5%, will have to pay Rs 1,88,493 towards interest alone in the first year. Which means his annual interest payment in the first five years will be more than Rs 1.5 lakh.

In case the exemption limit is raised to Rs 2.5 lakh, then a person paying that much home loan interest in a year will be able to save an additional Rs 31,000 in tax every year. Thus with this saving of over Rs 2,500 a month, for most of borrowers purchasing home will become more affordable.

According to existing norms, the borrower gets tax benefits only after the construction of the house is completed, which usually takes 2-3 years in case of builder flats.

The housing industry has asked the government to give the tax deduction benefit to the borrowers as soon as loan repayment starts, as this will give substantial relief to home buyers and increase the demand.

In the Budget documents an estimate of the revenue forgone on account of this exemption has not been mentioned but it is unlikely to be very significant.

Out of the total Rs 38,107-crore tax revenue given up on account of tax exemptions to individuals in 2007-08, nearly Rs 30,000 crore is on account of Section 80C benefit, one component of which is principal repayment on housing loan.

Over the past months the housing sector in the country has been hit hard by demand slowdown, due to rise in interest rates.

In addition to lowering of home loan interest rates, the industry has been continuously asking for greater tax benefit, as it had the probability of stimulating demand.